UK Government Borrowing Lower Than Forecast in July

Surprise Budget Boost May Signal Financial Stability and Positive Investor Sentiment

A Welcome Surprise for the Treasury

In an unexpected turn of fiscal fortune, the UK government borrowed significantly less than anticipated in July 2025. According to the Office for National Statistics (ONS), public sector net borrowing stood at just £1.1 billion – less than half the £2.6 billion forecast by economists polled by Reuters.

This represents the lowest level of monthly borrowing since July 2021, during the height of the COVID-19 pandemic, offering a welcome reprieve for Chancellor Rachel Reeves and her economic team.

What’s Behind the Drop in Borrowing?

Stronger-than-expected tax and national insurance receipts played a key role in reducing the gap between government income and expenditure.

Key drivers:

• Higher income tax collections due to rising wages and strong employment levels.
• Robust national insurance contributions, boosted by an expanding workforce.
• A temporary easing in certain spending categories.

The result is a £2.3 billion year-on-year reduction in July borrowing compared to the same month in 2024.

Long-Term Borrowing Costs Still a Concern

While monthly borrowing fell, the cost of managing government debt continues to rise. The interest paid on existing government debt in July totalled £7.1 billion, £200 million more than the same time last year.

This increase is largely attributed to:

• Rising bond yields, with 30-year gilt yields reaching their highest levels since 1998.
• Market expectations of sustained higher interest rates.
• Growing investor demands for better returns on UK debt.

Despite these challenges, government officials remain committed to lowering overall borrowing across the parliamentary term.

Treasury Reaction and Policy Implications

Darren Jones, Chief Secretary to the Treasury, stated:

“Far too much taxpayer money is spent on interest payments for the longstanding national debt. That’s why we’re driving down government borrowing – so working people don’t have to foot the bill and we can invest in better schools, hospitals, and services for working families.”

The government’s aim appears twofold: restore fiscal credibility and create space for increased investment in public services.

How Could This Impact Investors?

Improved fiscal discipline and lower-than-expected borrowing can have several knock-on effects for investors:

Potential implications:

• Bond markets: Could see renewed confidence, stabilising yields and improving long-term returns.
• Sterling strength: Lower borrowing may boost international confidence in the pound.
• Equity markets: Reduced fiscal risk could encourage capital inflows into UK stocks.
• Interest rates: The Bank of England may gain flexibility on future rate decisions if fiscal policy remains supportive.

For investors, this could mean a more attractive environment for UK equities and fixed income – particularly in sectors linked to public investment like infrastructure, education, and healthcare.

Conclusion: Encouraging Signs, But Challenges Remain

While July’s borrowing figures offer an optimistic signal, the broader picture still shows £6 billion more in total borrowing for the current financial year compared to the same period in 2024. Debt servicing costs remain elevated, and global economic uncertainty continues.

However, signs of fiscal improvement – especially when driven by strong revenue collection rather than spending cuts – provide a potential tailwind for the UK economy and financial markets.

If the trend continues, the UK could see:

• Greater economic stability
• Increased investor confidence
• Stronger demand for government bonds
• A more positive outlook for domestic stocks

Investors should watch closely in the months ahead, as the government's commitment to fiscal responsibility could translate into investment opportunities in both public and private sectors.

Sources: (Skymoney.com, BBC.co.uk)